Opinion: So Which Is It? Bullish Or Bearish?

Several of you have pointed out that that my comments are exceedingly bullish at times, and bearish at others; you’ve asked for clarification on my position on the direction of the industry. The easiest thing to do is to admit that I’ve probably spoken out of both sides of my mouth from time to time because I actually hold both positions depending upon my mood.

Nov 23, 2010

Several of you have pointed out that that my comments are exceedingly bullish at times, and bearish at others; you’ve asked for clarification on my position on the direction of the industry. The easiest thing to do is to admit that I’ve probably spoken out of both sides of my mouth from time to time because I actually hold both positions depending upon my mood.

For instance, I’m extremely bullish when I look at supplies. We’re in the midst of the longest cattle cycle in history, where the U.S. beef herd has declined 12 of the last 14 years. In fact, one of my favorite economists, Oklahoma State’s Darrell Peel, recently pointed out that 2010 represents the smallest beef cowherd since 1963, the smallest calf crop since 1950, and the lowest total inventory since 1959. Certainly, that’s not all good news, as the reason for liquidation is always a lack of profitability.

But BSE decimated our export markets in 2003, from which we’re still recovering. And, ethanol subsidies and mandates dramatically raised the cost of corn and risk associated with beef production. Part of the reason for the smaller cowherd is simply the industry rationalizing supply to the new dynamics of ethanol.

Interestingly, despite the declining numbers, we haven’t seen tonnage decline significantly. Of course, we’ve done this in the short term by using a higher percentage of our calf crop, put historically high levels of heifers on feed, and placed more cattle on feed as yearlings and taking them to higher outweights. Those solutions, however, aren’t sustainable. Plus, we’re closing in on upper weight limits and portion-size considerations and the placement of higher numbers of heifers means that eventually numbers will tighten further.

Of course, higher corn prices resulted in more yearlings being placed and more weight, but ultimately economics will mean less corn and less weight. Obviously, making up for reduced steer slaughter through increased heifer and cow slaughter can only occur for so long. The result is we will see, and finally feel, the impact of tighter numbers going forward. When expansion actually does begin, that will make available numbers and tonnage tighten even more. So, one has to be bullish when looking at the supply side of things.

Demand is always complicated, but when one considers BSE and the global economic downturn, beef demand has fared pretty well, at least in comparison to the other proteins. My American pride doesn’t look at China’s ascension toward becoming the driver of the global economy as a good thing, but China is the world’s largest market, which should be a bonanza for beef demand.

The world’s population is expected to double by 2050; that means demand for food has only one direction long term – upward. While domestic demand has been falling, global demand should be expanding.

I also have hope that America’s march towards socialism will slow and that we return to the principles that made us the world’s only economic superpower. Yes, the exploding debt is unsustainable, and the devaluation of the dollar seems inevitable. But, from an export standpoint, the devaluation may actually be positive in the long-term.

Certainly, ethanol means a smaller industry, and the increased risk and volatility in the corn market means more risk and uncertainty in the cattle markets. Yet, barring unforeseen outside forces, we should see record-price levels for the next 4-5 years, and that’s pretty exciting.

This is already evident in the bull market. A $3,000 bull a year ago is costing $4,000 today. The downside is that these new price levels don’t necessarily equate to record profits, as costs are rising as well. When you throw in the increased costs, additional risk, rising land values, and the graying of our producers, we also have a new dynamic.

Profits of $50-$100/head may not result in expansion like it has in the past. The real risk is not from basic supply and demand but from outside influences like GIPSA, ethanol, inflation, interest rates and higher taxes effecting the market environment we operate in.